Gifts and Inheritance Tax

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Making gifts from capital and income can reduce your Inheritance Tax (IHT) liability - but there are rules you should be aware of

If your estate is worth more than the Inheritance Tax threshold - £325,000 (2014/15 tax year) - there are some important Inheritance Tax exemptions that allow you to make gifts to others which will be free of IHT when you die.

Reducing the value of your estate

By making lifetime gifts to your loved ones from your capital or after tax income, you can help to reduce any inheritance tax. But gifts can become subject to IHT, so it's important to understand the rules. You should therefore seek financial advice when estate planning.

Who can you make gifts to without paying Inheritance Tax?

Gifts made to certain people and organisations are exempt from IHT whether you make the gift in your will or while you're alive. These are:

  • your spouse or civil partner, provided they are domiciled in the UK. *
  • A qualifying charity
  • UK political parties, provided they have at least two MPs or one MP and at least 150,000 votes.
  • certain institutions, such as universities and museums.

As of 6 April 2014 the amount you can transfer free of IHT to a non-domiciled spouse or civil partner is up to the Inheritance Tax threshold limit at time of transfer. Also a non-domiciled spouse or civil partner can make an election to be treated as UK domiciled for IHT purposes.

Other IHT exempt gifts

You can give away up to £3,000 a year which will not become liable for IHT. You can also make small gifts up to the value of £250 per individual to as many individuals as you like in any tax year.

Gifts to people getting married or registering a civil partnership are exempt up to certain amounts.

  • Parents can each give cash or gifts worth £5,000.
  • Grandparents and great grandparents can each give cash or gifts worth £2,500.
  • Anyone else can give cash or gifts worth £1,000.

The seven year rule

Any gifts you make to individuals will be exempt from Inheritance Tax as long as you survive for seven years after making the gift. These sorts of gifts are known as 'Potentially Exempt Transfers' (PETs).

However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.

If you die between three and seven years after making the gift, the IHT on the value of the gift that's over the threshold is gradually reduced. This is called Taper Relief.

Gifts with reservation of benefit

If you continue to benefit from a gift – for example, if you give your home to your children but continue to live in it rent-free – it won't be exempt from IHT. This is called a gift with reservation of benefit.

Reduced rate for charitable giving

If you leave 10% or more of your estate to charity, the rate of IHT on the amount above the threshold will be reduced from 40% to 36%.

Getting the most out of your gifting allowance

One way of using your gifting allowance to your maximum benefit is to gift money out of your regular income (not your capital). This isn't liable for IHT, provided you can maintain your normal lifestyle after making the gift. You could do this to help with:

  • a loved one's mortgage
  • school fees
  • a pension fund for children or grandchildren
  • a loved one's day to day expenditure
  • funding a life assurance plan

You could also make gifts into a trust.

IHT and trusts

Trusts can be helpful in estate planning, and are often suitable for people who have assets and money they can afford to live without. The rules on IHT vary depending on the type and value of the trust.

Discretionary trusts: These trusts give flexibility around who benefits from the assets in them. Gifts to a discretionary trust are automatically subject to an IHT charge of 20% on the amount over the threshold.

Bare trusts: the beneficiaries of the trust and the amount they will receive are decided at the outset and can't be changed. Gifts to the trust are potentially exempt, so IHT won't be payable on them provided the donor survives for at least seven years.

Discounted gift trusts: it's possible to gain some Inheritance Tax relief by putting savings or investments into a discounted gift trust. These can be set up as bare trusts or discretionary trusts.

You make a gift into the trust and withdraw fixed regular payments from it which you can use as income. When you set up the trust, an estimation of your life expectancy is made based on your age and health , to forecast what you are going to withdraw; this amount isn't considered part of the trust, therefore discounting the value of the initial gift for IHT.

Loan trusts

With a loan trust, you lend capital to the trustees, who invest the capital in a tax efficient way which allows any growth in the trust to be free of IHT. You are able to withdraw capital from the fund, which is considered as a repayment of the loan.

Next steps

Check if you qualify for advice

HSBC Premier Financial Advice is only available to UK residents who have £50,000 or more in savings and investments (not including pensions) and who are at least 18 years old at the time of the initial consultation. See the full eligibility criteria.

If you don't qualify for HSBC Premier Financial Advice or if you'd rather not pay for advice, see other ways we can help.

Please be aware that the value of tax benefits will depend on individual circumstances, and tax rules may change in the future.

Need financial advice?

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Everyone's circumstances are different and what applies to one person may not be right for someone else. The suggestions above are based on a general assumption of each circumstance and they are not intended to provide advice or recommendation.